The Basics of Social Security

The U.S. Congress enacted the Social Security Act in 1935, creating the Old-Age and
Survivors Insurance (OASI) program, which provided retirement income benefits to workers
ages 65 and older in commerce and industry (except railroads). The system became effective
in 1937, and is financed by a payroll tax paid by employers and employees. In 1939, the
system was expanded to cover dependents and survivors of covered workers. Legislation
enacted in 1950 and subsequent years allowed states the option, under certain conditions,
to provide Social Security coverage to their employees. The Social Security Act Amendments
of 1983 prohibited states from opting out of the Social Security program. In 1990, Social
Security coverage became mandatory for state and local employees not covered by a state or
local government retirement plan.

In 1956, the Disability Insurance (DI) program was added to the Social Security program,
providing income to disabled workers. In 1958, dependents of disabled workers receiving
benefits under the DI program became eligible for benefit payments.

Currently, the U.S. Department of the Treasury credits the Medicare and Social Security
trust funds with any annual excess of Social Security and Medicare tax revenues over the
amount spent for current benefits. By law, these assets must be invested in special
securities issued by the Treasury. The government then spends these "assets" to
ease fiscal pressures on other programs. The trust fund surpluses are not reserved for
future Social Security and Medicare benefits but are bookkeeping entries showing how much
the Social Security and Medicare programs have lent to the Treasury (or alternatively,
what is owed to Social Security and Medicare, including interest, by the Treasury). When
the trust funds go into negative cash flow, the Treasury must start repaying the money.

For budgetary purposes, the date on which the trust funds go into negative cash flow
(i.e., the benefit payments exceed the income from payroll taxes and the taxation of
benefits) is more important than the insolvency date (i.e., the date on which the trust
fund is projected to exhaust its funds and be unable to pay benefits on time and in full).
This date is more important because it marks the point at which the government must
provide cash from general revenues to the programs rather than receive surplus cash from
them to fund other current spending.

According to the 1998 Social Security trustees' report, under intermediate assumptions,
the combined Old-Age, Survivors and Disability Insurance (OASDI) trust fund expenses are
expected to exceed income from taxes in 2013. By 2021, OASDI expenses are expected to
exceed income from taxes plus interest income (negative cash flow), and the trust fund is
expected to be exhausted by 2029. The DI trust fund is expected to go into negative cash
flow in 2009 and to be exhausted in 2019, and the OASI trust fund is expected to go into
negative cash flow in 2023 and be exhausted by 2034.

The Social Security trust funds are derived from payroll taxes assessed on employers and
employees. Under current law, the payroll taxes are assessed as follows. OASI payroll
taxes for 1998 are based on a combined employer/employee rate of 10.7 percent of earnings
up to a maximum taxable amount of $68,400. The maximum taxable amount of earnings
increases in proportion to increases in the average wage level. The tax rate is scheduled
to remain constant for years 1997-1999 and then decrease to 10.6 percent in 2000 and
afterward. In 1997, $397.2 billion was collected for the OASI trust fund.

DI payroll taxes for 1998 are based on a combined employer/employee rate of 1.7 percent
of earnings, up to a maximum taxable amount of $68,400. The maximum taxable amount of
earnings increases in proportion to increases in the average wage level. The tax rate is
scheduled to remain at 1.7 percent for years 1998-1999, then increase to 1.8 percent in
2000 and afterward. In 1998, $60.5 billion was collected for the DI trust fund.

The fluctuations in the tax rate for the OASI and DI trust funds occurred because of a
reallocation of funds. In 1992, the DI trust fund went into negative cash flow and was
projected to become insolvent in 1995. To alleviate this problem, Congress enacted the
Social Security Domestic Employment Reform Act of 1994 (P.L. 103-387), which reallocated a
portion of OASI taxes to the DI trust fund, effective retroactively.

In 1997, 37.7 million beneficiaries received benefit payments from the OASI program. In
1997, 6.1 million individuals, disabled workers, and their dependents, received benefit
payments. Under intermediate assumptions, the number of OASI beneficiaries is projected to
increase to 38.6 million in 2000 and to 69.9 million in 2030, and the number of DI
beneficiaries is projected to increase to 6.6 million in 2000 and to 11.7 million in 2030.

In 1945, the number of covered workers per OASDI beneficiary was 41.9. By 1965, that
number was 4.0, and in 1997, it was 3.4. Under intermediate assumptions, the number of
covered workers per OASDI beneficiary is estimated to be 3.3 in 2000, 2.0 in 2030, and 1.9
in 2060.

In 1997, total benefit payments from the OASI trust fund amounted to $316.3 billion.
Total benefit payments from the DI trust fund were $45.7 billion.

Source: EBRI Databook on Employee Benefits, fourth edition, and U.S. Social Security
Administration, 1998 Annual Report of the Board of Trustees of the Federal Old-Age and
Survivors Insurance and the Disability Insurance Trust Funds (Baltimore, MD: U.S. Social
Security Administration, 1998).

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